Why Care About The Self-Employed?

If you’ve been reading my posts about the self-employed on Huffington Post, you may wonder why you should care about tax reform for the self-employed. Why care if self-employed make less money than employed yet pay higher tax rates? So what if lower-income self-employed get taxed twice on the higher amount they have to pay for SE (Social Security/Medicare) tax?

How many self-employed people are there in America anyway?

The US Census Department, 2009 Current Population Survey counted more than fifteen million. That’s well over ten percent of the US workforce, and it’s one-third greater than the current 7.7 unemployment rate that has everyone so worried. Fifteen million is three times the total membership of the powerful lobbying group, the NRA (National Rifle Association).

So, why isn’t the government concerned about self-employed Americans? And why should you care?

Gillian Tett, editor and columnist for the London Financial Times wrote an FT article on April 13, 2012 called “US companies dash for cash heralds a painful freeze”. Tett asserted “Cash has become like a corporate security blanket, something executives cling to in frightening times.”

The shocking thing about this article wasn’t that US corporations were hoarding cash. Anyone who has followed the persistent stories of employee layoffs of American workers knows that a significant amount of corporate cash has not been spent on expansion and job creation. As Tett opined, “…it could take years before they [corporations] really start feeling confident again.”

What was astonishing about US corporate cash is that it is being kept in — banks! According to Tett’s source, in 2006 only 23 percent of corporate cash could be found stashed in banks. In 2010 corporate treasurers stored over 50 percent of their cash in banks. Why? Because banks are FDIC insured.

This month on the CNBC show, “Investing Edge,” Pip McCrostie, Vice Chair for Global Transactions and Advisory Services at Ernest & Young, said US corporations have been sitting on huge piles of corporate cash for over five years!

She continued: corporations have been taking the safe route of cutting expenses, mainly employees. They can’t cut expenses much more, and they’re being pressured by shareholders who want dividends or some kind of action. That action is likely to be buying up other companies. (Yep, you got it, more conglomeration and less competition.)

In addition, multinational corporations who are sitting on trillions of dollars earned abroad are demanding that corporate taxes on that income be lowered – down to ZERO! Why? So they can bring even more money back to the US and park it in… BANKS? Or will US corporations, as McCrostie suggested, use money earned abroad to buy out other companies? We all know where that leads – more layoffs.

Overall, large US corporations are still refusing to create new products – and new jobs. Want new job creation? Look to small business!

Helping the real job creators

There are two types of self-employed. Both are sources of new job creation, but in different ways.

“Unincorporated” self-employed generally work alone, with a partner and/or with an adminstrative assistant. In addition to creating jobs for themselves, they hire other self-employed on an “as-needed” and “part-time basis”. Almost two thirds of the self-employed are unincorporated. To open their business, they simply say “I am self-employed” and they are. These self-employed use IRS’ Schedule C.

The other five million self-employed are incorporated (i.e., non-Schedule C filers). They’re comparable to high-level managers of larger organizations. Unlike unincorporated self-employed, they can deduct their own wage as a business expense. They are more likely to hire employees than self-employed workers. The Bureau of Labor Statistics (BLS) excludes these incorporated self-employed from its self-employment statistics; it labels them as “wage and salary” workers.

Both political parties pay lip service to the five million incorporated self-employed who own small-businesses, but neither pays any attention to the ten million unincorporated self-employed, currently closer to 9.3 million (See page 15.).

For example, the BLS collects demographic statistics about unincorporated self-employed workers, such as gender, age, and race, but BLS doesn’t do studies of their incomes. The Census Bureau asks about salary, but its statistics lump unincorporated and incorporated self-employed together.

We need our government to provide meaningful, comprehensive, and separate statistical research on incorporated and unincorporated self-employed, especially in regard to income levels and the impact of taxes on each group. It’s vital that this 10.2 percent of the American workforce (formerly 10.9 percent in 2009) can survive to provide leadership in bringing innovation and new job creation to the US.

To encourage our government to pay closer attention to self-employed Americans, I suggest creating a nationwide trade association for those most vulnerable to business cycles, the 9.3 million unincorporated self-employed.